Analyzing the Efficacy of the Fed's Secondary Market Corporate Credit Facility

Gilchrist, Simon; Wei, Bin; Yue, Vivian Z.; Zakrajšek, Egon

doi:10.29338/ph2024-05

Journal Article

Analyzing the Efficacy of the Fed's Secondary Market Corporate Credit Facility

Abstract: This article analyzes the effectiveness of the Secondary Market Corporate Credit Facility (SMCCF) in stabilizing the US corporate bond market during the COVID-19 pandemic. The SMCCF announcements in March and April 2020 significantly reduced credit spreads across different bond maturities, restoring a more typical upward-sloping yield curve. The Federal Reserve's bond purchases, though relatively small in scale, notably decreased credit spreads for eligible bonds compared to ineligible ones. The study's model suggests that market dynamics, including a rush to sell short-term safe bonds and increased investor risk aversion, contributed to the unusual yield curve inversion during the height of the pandemic. By reducing risk aversion and improving market conditions, the Fed’s actions helped restore a more normal credit curve, particularly in the investment-grade bond segment.

Keywords: COVID-19; SMCCF; credit market support facilities; event study; purchase effects; preferred habitat;

JEL Classification: E44; E58; G12; G14;

https://doi.org/10.29338/ph2024-05